This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

Tag Archives: Accounts

This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!! if you want to discuss how any of these issues – or other tax and related business matters – may affect your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.

To sign up for our monthly Newsletter for Small Business visit our webpage here.

Reducing the reporting of expenses and benefits

Q: I’ve recently submitted forms P11D and P11D(b) for benefits in kind and business expenses. They’re so fiddly and time-consuming- is there any way I can reduce the paperwork and preparation time?

A: You could apply for a dispensation (on form P11DX) from HMRC. This can be done online here. If you are successful, this form completely removes the requirement to report anything covered by the dispensation on form P9D or P11D. Note that there is no need to report mileage claims paid at the normal rates (£0.45 for cars for the first 10,000 miles, and other rates as applicable.) and if that is all you pay out, then no need to apply for a dispensation either.

There is a list of expenses that can be covered by dispensations, but examples of expenses typically covered are:

Travel, including subsistence costs associated with business travel

Fuel for company cars

Hire car costs

Telephones

Business entertainment expenses

Credit cards used for business

Fees and subscription

Put simply, to stand a chance at obtaining a dispensation, you must have an independent system in place for checking and authorising expense claims so as a minimum, someone other than the employee must check their claim. If you are a sole director, you may still be successful, provided that you obtain receipts for all expenditure and the expenses are within the list referred to above.

Although dispensations can remain in force indefinitely, HMRC reviews them regularly (usually at intervals of five years or less) to make sure the conditions under which they were granted still apply. They cannot be backdated to previous years, but in normal practice they are effective from the start of the tax year in which they are granted.

Company filing requirements

Q: I have just set up a company. Could you walk me through the filing requirements I’ll have for the company please?

A: Firstly, there is the Annual Return.This is a snapshot of general information about a company’s directors, secretary (where one has been appointed), registered office address, shareholders and share capital. The return covers the first twelve months from incorporation and is submitted annually thereafter. On each anniversary, you have 28 days to submit the return to Companies House. It is a criminal offence not to do so and officers and the company may be prosecuted for late delivery. There is a filing fee of £14 for electronic filing and £40 if filing on paper.

Then there are the company accounts. Your first set will need to be filed with Companies House within 21 months of the date of incorporation. Thereafter, they will need to be filed within 9 months of the ‘accounting reference date’ (effectively the company’s year end), unless you subsequently change the accounting reference date. There is no fee for filing the accounts.

The company will also need to pay any corporation tax it owes. This will need to be paid to HM Revenue & Customs nine months and one day from the accounting reference date.

The company will also need to submit its corporation tax return to HM Revenue & Customs. This is due twelve months after the accounting reference date. There is no filing fee for this either.

Please note that any change in the company’s accounting reference date can affect some of these deadlines, and they may vary from the rules given above.

As you’re just starting out in business, you may find it useful to talk to us about some of the other requirements such as record-keeping and dividend paperwork

VAT registration avoidance

Q: I’ve been running a bed and breakfast for a few years now, and my turnover to March was just over £60k. I therefore fear I may breach the VAT registration threshold soon, so could I split the business up and deem a portion of it to be my husband’s? My husband has a full-time job and does very little to help with the business.

A: Firstly, let me start by making you aware that the turnover limit for VAT registration is for any consecutive twelve months; not the turnover during your accounting period nor the turnover in the tax year. Therefore, as you are getting close to the threshold, you must ensure you review this at least every month. Late registration can lead to penalties and interest.

In answer to your specific question, business activities cannot be ‘artificially separated’ in order to avoid VAT registration. HM Revenue & Customs even go as far as to specifically list the bed and breakfast trade as a sector where artificial separation is a common tactic, often between the accommodation and the catering sides.

If you deliberately avoid registering for VAT, you may be liable to a penalty. For serious offences, you could even face prosecution. HM Revenue & Customs have also recently launched their VAT Initiative Campaign, which is essentially an amnesty for traders to come forward and admit they should have been VAT registered, so VAT is a hot topic at the moment.

If you are concerned about breaching the VAT registration threshold and the impact it would have on your business, talk to us. We can help you with setting up record keeping systems to make the administration of VAT reasonably straightforward.

Retention of records

Q: I prepare a tax return and have done for years. I’ve never thrown any of my records away, but I’m starting to run out of space! What are HM Revenue & Customs’ requirements?

A: Everyone must keep their records for at least twelve months from the due date of the return. So, for the 2010/11 year, returns must be filed by 31 January 2012. Therefore, the relevant records must be retained until at least 31 January 2013.

However, if you have any self employment or rental activities, the related records must be kept for five years from the due date of the return. So following on from the example above, the records would need to be kept until 31 January 2017.

Should your return be submitted late one year, you will need to keep the records for the year until the later of:

five years after the normal filing deadline

fifteen months after the date you sent your tax return

Gross CIS receipts

Q: I am a registered subcontractor, and I currently receive payments from my customers after the deduction of tax. I got talking to my mate down the pub, and he reckons he gets his money gross. Am I able to receive my invoices gross too?

A: There are three tests that your business must satisfy in order to apply to HM Revenue & Customs (HMRC) to receive your payments gross. In order to qualify, the business must:

1. Business Test

Do construction work in the UK

Be largely run through a bank account

2. Turnover Test

Have a turnover excluding VAT and the cost of materials of at least £30,000 per annum (please note there are different limits for companies and partnerships)

3. Compliance Test

Have complied with all its tax obligations in the 12 months before applying

Have submitted all tax returns on time in the 12 months before applying

Have paid all tax due on time in the 12 months before applying

There is some leeway to the Compliance Test and HMRC will allow you some slip-ups.

To apply, use HMRC form CIS302 (please note, there are other forms for partners and companies). If you would like any assistance with or advice about the application process or any other matter, please contact us.

Charging late-paying customers interest

Q: Although my business has not suffered too badly through the recession, I have noticed that many of my customers are paying me much later than I would expect and this is giving me some cashflow problems. Have you any advice about strengthening my settlement terms?

A: Unless you state otherwise, an invoice is due within thirty days of the invoice date. You should state the terms on your invoices and to make it even more obvious, the due date itself.

If an invoice is not paid within this time, you are entitled to charge interest. This is not compulsory, but if you do, you should charge it at the Bank of England base rate plus eight percent and apply this to the gross (no VAT is chargeable on the interest itself). Your invoice must state that you reserve the right to charge interest.

You could also set out your terms of trade in a terms and conditions document which should be issued to your customer. This document could then go into more detail, such as setting out any credit limit applicable and the criteria to qualify for any discounts you permit, as well as reiterating the items above.

If you do decide to incorporate any of the above into your terms and conditions and invoices, you need to notify your customers about this change and this should be done in writing. And if you later do intend to exercise your right to charge interest, you should issue a letter to your customer that the payment is late and if the invoice is not paid within, say, seven days, interest will be charged.

If all else fails, there is also the last resort of court action.

What is the ‘NIC holiday’?

Q: I’ve heard about a NIC holiday, but I’m not sure what it means or if I’m eligible. Can you tell me more about it please?

A: Its full title is the Regional Employer National Insurance Contributions (NICs) Holiday for New Businesses. As the name suggests, it is focused at new business, set up between 22 June 2010 and 5 September 2013.

Under the scheme, new businesses may qualify for a reduction of up to £5,000 from their employer’s NICs that would normally be due, for each of the first ten employees they take on for up to 12 months.

You can only apply for the NICs holiday if your principal place of business is located within specific areas of the UK when your business started up, which can be found here.

Most trading entities can apply, i.e. sole trade, trading charity, company, investment business etc. Please note, there can be complications if the business is in receipt of other state aid, unclear in what region it is, when it started or whether it is truly new.

You can apply for the scheme online on HMRC’s website by following from the link above. If your situation is a bit more complex as above, HMRC prefer you to submit a paper form which you can obtain from the Employers Helpline on 0845 60 70 143.

If you think you may have been eligible, but didn’t apply for the scheme, you may also be able to backdate a claim.

Company stationery

Q: I’ve just set up a company and I am about to get the stationery/ business cards printed and website set up etc. What details do I have to show on them?

A: Please note, every trading company must display a sign with its registered name at its registered office and any other place it trades from, unless it is mainly a residential property.

You must include your company’s registered name in all business correspondence and documentation; whether in hard copy or electronic, including letters, emails, order forms, invoices etc.

As well as the company’s registered name, the company must also display the following on all its business letters, order forms and websites:

the part of the United Kingdom in which the company is registered (England and Wales/ Wales/ Scotland/ Northern Ireland);

the company’s registered number; and

the address of the company’s registered office;

There are more rules regarding more unusual companies, such as PLCs and investment companies but I assume these do not apply.

You do not have to state the directors’ names on business letters but if you do choose to include their names, then all directors must be listed.

As for business cards, the law is not prescriptive about what you show, so you can basically put whatever you like!

Disclaimer – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!! if you want to discuss how any of these issues – or other tax and related business matters – may affect your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.

To sign up for our monthly Newsletter for Small Business visit our webpage here.

July 2011

Companies making donations

Q: I am a director of a small limited company and want to make a donation to a local children’s hospice. Can you advise me on the implications?

A: Assuming that the children’s hospice is a registered charity, your company will get corporation tax relief on the donation. To get the tax relief, the company simply makes the payment to the charity and deducts the amount as a ‘non-trading charge’ when working out its profit for corporation tax purposes.

Charitable donations cannot be used to create or increase your company’s trading losses, and they cannot be carried over from year-to-year. So if you make a donation of more than your taxable profit, the excess is not tax deductible.

Please note, if the company receives any benefit from the charity as a result of the donation, such as an advertisement in its newsletter, there are restrictions of the value of the benefit, in order that the donation still qualifies for relief.

Furthermore, there are different rules if you were to gift anything other than cash, such as land or equipment.

Donations to charity

Q: I am a sole trader, and my business had an unexpected rise in profits in the year to March. Accordingly I recently made a big donation to Cancer Research. A friend of mine mentioned you can get tax relief on donations- could you tell me a bit more please?

A: You may be able to get some tax relief for the donation. To do this, firstly make sure that you have signed a Gift Aid declaration from Cancer Research, and that you have completed all of the necessary details on this form.

Next, make sure you will pay enough tax to cover the tax the charity will be claiming. To check this, divide your donation by four, and make sure it is less than your tax bill for the tax year the donation is made.

Because you have made this donation after your ‘bumper’ tax year, the donation should be claimed on next year’s return. However, you can carry the donation back; provided you paid enough tax in that year (calculation above) and you must not have filed that tax return yet.

As a rough guide, the tax relief you will obtain will be 25% of the donation if you are a higher rate tax payer and 3/8 if you are an additional rate tax payer. The charity itself will also get an additional amount related to your basic rate tax.

Mature donor

Q: My wife has recently been looked after by a local hospice during her Cancer treatment. Now she’s out and on the mend, I’d like to make a donation to the hospice to say thank you for looking after her. I am over 65 but still run my own sole trade. Can you tell me the tax implications please?

A: You may be able to get some tax relief for the donation. To do this, firstly make sure that you have signed a Gift Aid declaration from Cancer Research, and that you have completed all of the necessary details on this form.

Next, make sure you will pay enough tax to cover the tax the charity will be claiming. To check this, divide your donation by four, and make sure it is less than your tax bill for the tax year the donation is made.

As you normally complete a tax return, you can tell HMRC about your Gift Aid donation by completing the section on Gift Aid payments.

Because you are over 65, you will be receiving the larger, age-related Personal Allowance. To calculate the value of your Personal Allowance, HMRC will subtract the amount you donate plus the basic rate tax (that is, the ‘grossed’ up donation) from your total income and use the reduced figure. This may have the effect of increasing your Allowance if your income was above the relevant ‘income limit’ that applies, and therefore, more of your income could be tax-free!

Sponsorship

Q: My young boy plays in a local under 13s football team and they are looking for a new sponsor for next season. I run my own business as a sole trader and would really like to pay for the strip and put it through the business. But can I get tax relief for it?

A: As you can imagine, this is a particularly ‘grey’ area of tax. To be an allowable expense, the sponsorship must be incurred ‘wholly and exclusively for the purposes of the trade’.

To try and make this as transparent and business-related as possible, you need to demonstrate that you hope the sponsorship will benefit your business. So for instance, there should be:

an agreement in place, detailing things like:

what the team offers your business in return for the sponsorship (your name on their shirts, advertising around the pitch, attendance at their corporate events etc)

the size of the sponsorship

the duration of the sponsorship

correspondence documenting the negotiation of the payments and terms

evidence of how you found out about the opportunity to sponsor them

evidence of your decision to choose them over the alternatives

business plans

details of how the sponsorship will be exploited (i.e. local media)

It’s not ideal that you had pre-existing knowledge of the team before the sponsorship or that your son plays for them. But if you can follow HMRC guidance and essentially treat the relationship like any other business relationship, you stand a good chance of attracting tax relief against the sponsorship.

As this is such a murky area of tax legislation, please seek professional advice before entering into an agreement with the team.

Commuting

Q: I operate my business from home and spend one or two days a week where my staff work. Can I count my travel costs as tax-deductible?

A: This depends on the address of your business. If the address where the staff are located, is where the business trades from, that address will be the business place of work. If you travel to that address, the cost would not be an allowable deduction for tax purposes as it would count as simply travel from your home to your place of work. This applies even if you do some work from home.

If, however, your home is the business address then travel to your staff would be allowable.

Discounted Loan Rates for Employees

Q: As part of my employee benefits package, my employers have offered me a mortgage at a discounted rate. However, they have mentioned I will have to pay tax on this. Is this correct?

A: Unfortunately it is correct. If an employer provides an employee with a subsidised loan, the employee will be assessed on the difference between the interest rate actually charged and what is known as the “official rate of interest”. The employee will then pay income tax (20% if you are a basic rate taxpayer, 40% if you are a higher rate taxpayer and so-on) on the value of the benefit received each year. So it is still more beneficial to take up the low interest loan you have been offered.

Despite being charged tax on the benefit of having the low interest loan, you would not be liable to make any National Insurance Contributions, as your employer would be liable to pay these.

Beneficial Loans and Paying Interest

Q: I have received a loan of £10,000 from my employer, on which interest is chargeable at the current HMRC official rate. However, the interest is not payable until the end of the loan period. In the interim period the interest is rolled up and carried forward. Does this give rise to a benefit in kind?

A: You will have a benefit in kind, based on the difference between interest calculated at the HMRC official rate and the amount actually paid to the company during the same year.

Therefore because you will not physically pay the interest until a later tax year, the accrued interest cannot be taken into account when calculating the benefit in kind.

The benefit in kind should therefore be reported on form P11D for each tax year until the year in which the loan is repaid and the accrued interest is settled.

Once the interest has been paid, a retrospective claim for relief can be made for up to six years after the tax year the benefit occurred in.

If you would like more advice on expenses and benefits or wish to discuss other tax or accountancy related issues, please feel free to contact us.

Employer’s credit card

Q: In error, one of my employees recently paid for an expensive handbag on the company credit card; rather than her own. She’s performed really well in the last year, so I said she could keep it and not bother paying the company back. But are there any tax implications?

A: Firstly, you will need to add it to her earnings when calculating her National Insurance deductions. For the purposes of her PAYE calculation, it will be ignored though.

You will also then need to report it on form P11D in box C, but this will not trigger any Class 1A National Insurance for you to pay.

And finally, she will then need to complete a tax return and declare her income and the ‘benefit’ shown on her P11D.

Therefore, National Insurance will be deducted from her almost immediately via the payroll. And then she will be taxed on the benefit once the tax year end has passed. In effect, the cost of the bag is treated like any normal wages; there’s just a delay in the collection of the tax.

Disclaimer – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!! if you want to discuss how any of these issues – or other tax and related business matters – may affect your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.

To sign up for our monthly Newsletter for Small Business visit our webpage here.

Can I use my loss?

Q: I paint in my spare time and sometimes, my friends and family buy my paintings from me. Because artists’ materials can be expensive and some pieces don’t work out and I throw them in the bin, I run at a loss. Luckily, I have a full-time job to keep the money coming in but is there any way I can use my painting loss to reduce my tax bill?

A: HM Revenue & Customs stipulate that losses may only be offset if the trade is commercial and it aims to generate a profit. Your outline of your circumstances suggests you are not optimistic of ever turning a profit, and therefore, you are unlikely to be able to offset your losses against your employment income. Instead, the losses will be carried forward and can only be offset against any profits your business makes.

It also sounds as if you need to review what constitutes a trade, before you register as self-employed. You need to consider for example, if you have ulterior motives (i.e. it’s a hobby), the frequency of the paintings, the turnaround times of the paintings, and (as mentioned above) if you really hope and intend to make a profit.

There is no conclusive definition of what constitutes a ‘commercial’ basis or a ‘trade’. And whilst HM Revenue & Customs provides guidance on these areas, it is in part, a judgment call.

Selling on Ebay

Q: I own a shoe shop but due to cash-flow problems, I have been selling some of my personal belongings and old stock on Ebay recently. Should I include my income from Ebay on my tax return?

A: All your trading sales (whether you sold through the internet, at car boot sales, through small ads or any other means) should be included in your total sales figure. If you are VAT registered, you should also charge VAT on sales to your customers where applicable. Remember to include any sales to friends and family and don’t forget to include cash sales too.

As for the sales of your personal belongings, it is unlikely you will need to declare the proceeds on your tax return, unless you can answer yes to at least one of these points:

buy goods to then sell online

sells items that you have made, and you made them with a view to profit

sell goods for others, on commission

sell a service and get paid for it

And a word of warning- HMRC has a tax evasion hot line for people to ‘tip-off’ plus it uses computer programmes to scan internet sites like Ebay and look for people making multiple transactions.

If you are unsure or would like to discuss this further, please feel free to contact us..

HMRC are knocking at the door!

Q: HMRC have sent me a letter asking to visit my premises. I work from home and have young children, so I am not keen on them visiting my house. Is there any way I can refuse to let them visit? If not, can I hold the meeting somewhere else?

A: If you do not co-operate in trying to arrange a visit, HMRC have the power to arrange an unannounced visit, so this may only defer the problem; not eliminate it.

Whether you accept their proposed arrangement for their visit or they turn up unannounced, they cannot force entry on to your premises. So you are entitled to refuse entry, although the inspector will try to establish why and they will try to re-arrange another appointment with you.

In either case, you are entitled to suggest an alternative venue, such as your accountant’s or a HMRC office.

During the course of an inspection, you are also entitled to ask them to leave, but again, they will note down the circumstances and ask you for a reason, and will want to arrange another time for them to complete their inspection.

Note that if you never used your home for business purposes, they would have had no right of entry whatsoever to your home unless you offered that venue to them.

We can help you to prepare for the visit and attend, so please feel free to contact us if this would interest you.

Newly let!

Q: Last year, I purchased a flat which my letting agent lets for £500 per month. After the agent has taken their 10% commission, I receive about £5,400 per annum. I’ve got an interest-only mortgage on the property, which annually costs me about £3,000. I am employed and pay tax via PAYE, and have never completed a tax return before. But one of my friends said that I need to complete a tax return now, because I need to declare this rental income and I should be paying tax on the profits too. Are they right?

A: If you don’t already complete a tax return (and assuming you don’t meet other criteria), you will need to do so if you your income from property is higher than:

£10,000 before deducting allowable expenses; or

£2,500 after deducting allowable expenses

You don’t meet either of the above rules; however, you must still inform HM Revenue & Customs about any new sources of income or changes to your income if:

You pay tax through PAYE on employment/ pension income and your other taxable income changes or becomes liable to higher rate tax; or

You don’t pay tax through PAYE and your total taxable income is more than the personal allowance you’re entitled to

Clearly, you meet the first rule and therefore you must inform HMRC of the rental income. They will then decide if you need a tax return. As you pay your tax via PAYE, they may be able to collect any additional tax due through your tax code though, which will cut down on the administrative burden.

If you would like to discuss this further or would like someone to handle this for you, please feel free to contact us.

Interest on start-up capital

Q: I am setting up my own business soon and I plan to re-mortgage my current home to raise the start up capital. Will the interest payable on my mortgage be considered a tax deductible expense against my business profits?

A: Whether or not the interest is deductible depends on the purpose of mortgage. Although the mortgage will be secured on your personal asset, in the circumstances outlined the interest is an allowable deduction when establishing the net profit of the business.

However, you will need to ignore the interest on the original mortgage element, as this is entirely personal. Also, if any of the re-mortgage funds are to be used for personal reasons, then the interest must be restricted further.

If you would like reassurance that you are claiming all the expenses available to you or you would like to discuss this further, please get in touch.

Bookkeeping – what do I do?

Q: I’ve just started my own business having been made redundant from my last job. I’ve registered with HMRC as self-employed, but could you tell me what my obligations are with regards to record-keeping for HMRC?

A: Under current legislation, business owners must retain their records for 6 years. Payroll records, CIS records and personal tax return information may be retained for less.

HMRC provide no rules regarding the format of the records, but as a minimum they should include all sales and purchase invoices.

Ultimately, the most important factor is that you keep accurate, timely records. So these could be anything from manual cashbooks, to computerised spreadsheets, to a sophisticated computerised bookkeeping package.

Penalties will apply if HMRC ever enquired into your affairs and found no evidence to back up the figures in your income tax or VAT returns. HMRC are also clamping down on poor records, and can impose fines in severe cases where the records are felt to be inadequate and inaccurate.

We can give you advice on finding the right bookkeeping solution for you and more detail on your obligations..

Giving personal assets to my business

Q: I’ve just started my own business and wondered if it was possible to ‘give’ the business one of my personal computers and get tax relief on it?

A: You may bring an asset into your accounts regardless of the original reason for it being purchased (i.e. personal), provided it will be used for the trade.

There are a few unusual circumstances, but normally the asset should be valued in your accounts at market value; rather than cost.

You may continue to use it occasionally for personal purposes, but the tax relief on the computer will be restricted accordingly between business and private use.

Starting a business can be a stressful time, but we can help put your mind at ease and assist with your administrative obligations.

Working for their pocket money

Q: I run a cafe and would like my kids to work there during the summer holidays when they’re off school. I would really like to pay them for the hours they work- to make them appreciate money! But I don’t want too much paperwork to deal with- is there any way I can get round it?

A: In order to avoid paperwork and calculations, firstly make sure that they only work during holidays; and not term-time.

Each of them must also complete and sign form P38(S) which you can download from HM Revenue & Customs’ website.

If they receive over £102 per week, you will need to ‘add’ them to your payroll records, as their details and pay will need to go on the year end forms submitted to HM Revenue & Customs.

But, provided they do not earn any more than £136 per week, you won’t need to calculate or deduct any PAYE or National Insurance; and nor will you have to pay Employer’s National Insurance.

Also make sure their hourly rates are in-line with the National Minimum Wage for their age group:

£5.93 – aged 21 and over

£4.92 – aged 18-20

£3.64 – aged 16-17 (for workers above school leaving age but under 18)

There are also lots of restrictions on when and how long children can work and their breaks, so please make sure you are aware of these requirements. You may also need to contact the Council depending on their age. Note, children under the age of 13 generally cannot be legally employed.

If you would like to discuss this further, please feel free to contact us.

Disclaimer – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!! if you want to discuss how any of these issues – or other tax and related business matters – may affect your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.

To sign up for our monthly Newsletter for Small Business visit our webpage here.

Withdrawals from a company

Q: My daughter has just found a house she’d like to buy and I would like to lend her £25k for her deposit. I am the sole director and shareholder of a company, and I am a higher rate tax payer. Can you give me a summary of the options I have for withdrawing the £25k from the company?

A: You have three main options:

Dividend

Assuming the company has sufficient reserves, you could declare a dividend. Don’t forget, as you are a higher rate tax payer, the net dividend should be big enough to cover your eventual, additional tax bill.

Director’s loan account

Assuming you do not have a director’s loan account in credit that you can draw on, any withdrawals you make from the company is a loan and will therefore trigger a tax charge. This is calculated as 25% of the balance of the loan at the end of the accounting period- however, HMRC will repay it as you pay the loan back. As the loan is in excess of £5,000, a benefit in kind will also be triggered. Using the current average rate of interest, the benefit would be 4% of the loan balance. Upon this, the company will pay employer’s national insurance (NI) at 13.8% and you will pay income tax at 40%. Again, ensure your withdrawal is large enough to cover the NI and income tax.

Bonus

If you take it as a bonus, you will pay income tax on it at 40%, the company will pay employer’s NI at 13.8% and you will pay NI at 2%. Again, ensure your withdrawal is large enough to cover the NI and tax. However, the company will receive tax relief on the gross bonus and the employer’s NI.

Cashflow must also be considered. Whilst drawing on the director’s loan account is likely to cost the least initially, unless you repay the loan it will continue to have the tax charge, income tax and NI implications year-on-year. Therefore, in the long run, it could be the most expensive option if the overdrawn loan account is not cleared.

Some of the calculations can be quite complicated and it’s worth seeking specific advice about which of the various options is best for you.

Tax relief on new cars

Q: I am self-employed and want to purchase a new motor vehicle for my business this month. A friend told me that if I buy a certain type of car I can receive tax relief on the full cost of the vehicle. Is this correct?

A: Cars are treated as capital assets for tax purposes and tax relief is given in the form of capital allowances; rather than a deduction for the cost of the vehicle. This means that the cost of buying the vehicle is not deducted when calculating your profit or loss for the year. Instead a proportion of the cost – a writing down allowance (WDA) – is given as a deduction each year until the full original cost has been relieved.

Cars with emissions below 160g/km attract a WDA of 20% a year and cars with emissions over 160g/km only 10%.

Your friend may be referring to the special allowance available for low-emission vehicles. Low-emission cars first registered on or after 16 April 2002 attract an allowance for tax purposes of 100% of the cost of the vehicle. In order to qualify, the emission level must not exceed 110 g/km for acquisitions made on or after 6 April 2009 (1 April 2009 for limited companies). For purchases made from April 2002 to April 2008, the maximum emission level for a qualifying vehicle was 120 g/km.

To find out if a vehicle will qualify for this enhanced capital allowance, contact the car manufacturer or dealership to check the CO2 emissions.

There are lots of things to consider when buying a new vehicle such as the benefit in kind implications, available capital allowances, income tax upshots and the finance of the purchase, but we can certainly assist you with your decision.Letting a furnished property

Q: Earlier this year I started to let out the flat that I previously lived in and have bought new furniture for most of the rooms. I have registered for self assessment with HM Revenue & Customs, so when will I receive a tax return and can I get some tax back if I have made a loss?

A: If your letting income commenced before 6th April, the first tax return you will need to prepare will be the 2011 return, which covers the tax year from 6 April 2010 to 5 April 2011. You will need to report all income received during that period, not just the income from the flat rental.

The cost of purchasing new furniture for the rental property cannot be deducted against the rental income in the year. When you first start to let out a furnished property, you need to choose between two options for relief with regard to the cost of furnishings.

You cannot claim the cost of the initial furnishings purchased, but one option is to use the ‘replacement’ basis, which means that you can deduct the cost of replacement furniture in the future. If you have just purchased new furniture, this may not be the best option as presumably it should not need replacing for some time.

The alternative is that you can claim an annual ‘wear and tear’ allowance as a deduction from the rental income. The allowance is 10% of the gross rents, after deducting certain costs you have paid on the property such as council tax or water rates. If this annual allowance is adopted, the cost of replacing any items of furniture cannot be claimed in the future.

Losses arising from rental income cannot be offset against other sources of income, so if you have made a loss, it will not generate a tax refund in the year. The loss will be carried forward and offset against future rental income profits.

Transferring property on divorce

Q: I am currently in the process of divorcing my wife and as part of the settlement agreement I am passing one of my rental properties to her. My solicitor has told me I may need to pay tax, but is this true if this is part of my divorce?

A: Under current legislation when chargeable assets are passed between spouses, they are treated as passing at ‘no loss/no gain’ which means there is no tax to pay. In the year of separation (i.e. the year in which a couple cease living together as husband and wife) the same rule is applied, so no capital gains tax is payable.

From 6th April following separation however the inter-spouse rules cease and any assets being gifted between the couple are treated as passing at open market value. This can lead to a capital gains tax liability for the donor. Therefore if you separated from your wife in the current tax year and if the property is transferred into her name before 5th April, no liability will arise. On the other hand, if you separated before 6th April 2011, or if the property is not transferred before 5th April this year, you may have a capital gains tax liability to settle.

If there is a gain chargeable to tax and it occurred before 6th April 2011, any tax due will become payable on or before 31st January 2012. On the other hand, if the transfer takes place on or after 6th April this year, any tax due will not become payable until 31st January 2013.

When selling or transferring property, there are many things to take into consideration with regard to the capital gain computation, especially with regard to allowable costs and various reliefs that may be available. You should therefore seek professional advice in connection with this and any other assets being transferred as part of your divorce.Company cars and benefit in kind

Q: My company car is due to be replaced early this year and I am keen to keep my taxable benefit as low as possible (as well, of course, as doing my bit for the environment). What are the current Benefit in Kind rates applicable?

A: The taxable benefit in kind you are deemed to receive from the private use of a company vehicle is still based on the CO2 emissions and the list price. The benefit is calculated by reference to a table of percentages which are dependent on the vehicle’s CO2 emission and range from 15% to 35%. Petrol cars produce less toxic emissions than diesel and therefore, diesel cars have a 3% supplement (up to the maximum of 35%).

Vehicles with emissions under 115 g/km are known as Qualifying Low Emissions Cars (QUALECs), and a special rate applies to these of only 10%. Note however, the 3% supplement for diesel cars is still relevant and the normal rounding down rules do not apply (i.e. a vehicle with emissions of 116 g/km would not be a QUALEC). Please note, (under current plans), in order for your vehicle to qualify as a QUALEC in 2012/13, the emissions will need to be under 99 g/km and for 2013/14 under 94 g/km.

If you are really serious about getting a low emission vehicle, those with emissions under 75 g/km attract only a 5% benefit in kind. And if electric cars appeal to you, vehicles with zero emissions trigger no benefit in kind.

Please note, the reductions for vehicles powered by bi-fuels, road fuel gas and bioethanol were abolished from April 2011. The discount given for Euro IV standard diesel cars registered before 1 January 2006 was also abolished then.

Claiming expenses for working at home

Q: I’ve been talking to my mates down the pub and I’ve found out that some of them claim lots more Use of Home in their accounts than I do, yet we do similar things. Why is that?

A: There are two main ways of calculating use of home. If there is only minor use, for example writing up the business records at home, you may put through a reasonable estimate with little risk of dispute by HMRC. Needless to say, it should be consistent with your household utility bills though.

If you were based from home, then you could apportion the household bills such as gas, electricity, water etc by dividing the total costs over the number of rooms, and multiplying that figure by the number of rooms used for business purposes.

In order to satisfy tax law, when part of the house is being used for the business then that must be the sole use for that part at that time. Thus if the part of the home used for business purposes is simultaneously used for some other non-business purposes, then no deduction is available. You should also avoid making one of your rooms solely for business purposes and out-of-bounds to the rest of your family though. Doing this could jeopardise an element of your Only or Main Residence Relief for Capital Gains Purposes, which normally sees any gain on your home reduced to nil.

As you can see from the above, if you don’t work from home regularly, you may be using the first method. If you are working regularly from home, then it would be advantageous to use the second, i.e. apportionment method.

In practical terms, you will need to be seen to be applying common sense to your claim, for example, if you only write up your books at home, there would be a far smaller charge than if you were working each day from home and treating it like an office.

Although there is no fixed proportion of costs for particular trades, there is an expectation of what use of home will amount to. Any enquiries from HMRC will be more likely when the amount of use of home claimed is significant and inconsistent with the nature of the trade.

Just to add to the confusion, the rules are different for sole traders and limited companies, so the legal structure of your business also needs to be taken into account. Each case will be different, so if you would like advice in this area, please feel free to contact us.Can I claim the cost of work clothing?

Q: I am self employed and while I do most of my work at my office, there are frequent occasions when it is necessary for me to visit clients in their workplaces in appropriate business dress. I need to buy a couple of new suits for such meetings – is this considered an allowable expense for tax purposes?

A: This is one of a variety of expenses which the Courts have held to have an “intrinsic duality of purpose” – which means they are not deductible for tax purposes.

The suits are actually classed as “ordinary clothing worn by a trader during the course of their trade” and are not deductible expenditure for tax purposes. This is the case regardless of whether particular standards of dress are required, for example, to comply with the rules of a professional organisation, or simply for the trader to keep up appearances on meeting clients.. Conversely, the cost of clothing that is not part of an ‘everyday’ wardrobe, such as protective clothing and uniforms (especially where they bear your business logo) is deductible against your business income for tax purposes.

Home broadband and telephone bills

Q: I run a small limited company working from my home address and arrange for the company to pay my home telephone and broadband costs. Are there any tax issues that should concern me?

A: The costs will be deductible against the company profits, but the personal tax position for both items will depend on whether the bill is issued in the name of the company or in your own name and will lead to an Income Tax and National Insurance (NIC) liability for you, based on the full costs incurred.

If the bill is in the company name, and the contract is between the company and the provider, then put the full amount of the rental and call charges on form P11D and they will be subject to Class 1A NIC- but the company pays this. You will then pay income tax on the benefit- although eventually, HMRC are likely to collect this tax via your tax code and the PAYE system. Alternatively, if you reimburse the company the cost of the private calls, no Class 1A NIC will fall due and you will eliminate the benefit.

If the landline is registered in your personal name, then it is regarded as a payment made on behalf of the employee. You should include the line rental and call charges with the employee’s gross pay. Therefore, Class 1 NIC and income tax will arise. Unless the use is exclusively business, the only way you can reduce the benefit is to identify any business calls, and no claim can be made against the line rental.

If you are making numerous calls for business purposes, it is probably more tax efficient for you to receive the use of a company mobile, registered in the company name. Generally, no tax or NIC liability arises on the use of a company mobile, even where the mobile is used for private calls.

If you think you are not claiming enough business expenses such as telephone bills or you would like to review the structuring of your expenditure, please feel free to contact us for some advice.

This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!! if you want to discuss how any of these issues – or other tax and related business matters – may affect your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.

To sign up for our monthly Newsletter for Small Business visit our webpage here.

Too big to cash account

Q: I am about to complete my VAT return for the quarter ended 31 March, and I fear that my turnover has crept to over £1.35m- which is the threshold for cash accounting for VAT. Despite best efforts, my customers are taking longer and longer to pay, so the VAT on my debtors is about £40k on average. If I have to pay the VAT liability on the normal ‘accruals’ basis, the bank account will exceed its overdraft limit and as I’ve only just had a review I don’t think we’d get an extension. Is there anything we can do?

A: When you leave the cash accounting scheme, you may choose either to:

account for all your outstanding VAT due in the period in which you stop using the scheme. This may be simpler but could have a serious effect on your cash flow if the amount of the VAT on your debtors is high, or

opt for a further six months in which to account for the outstanding VAT.

Please note that you cannot opt for the six months extension in which to account for the outstanding VAT if:

HMRC has withdrawn use of the scheme from you, or

the value of your taxable supplies has exceeded £1,600,000 and the value of your supplies made in the previous three months totalled more than £1,350,000

If you want to make sure your business is running as tax-efficiently as possible and making use of all the reliefs and allowances available to it, please feel free to contact us for advice.

Employer Supported Childcare Scheme

Q: I’ve just started a new job and my salary is about £60,000 per annum depending on bonuses. My employer offered me childcare vouchers in exchange for some of my salary. Should I take this offer up, or continue to pay for childcare out of my net pay?

A: If your employer’s scheme meets the criteria of a ‘qualifying’ scheme, these vouchers carry tax relief. Although you sacrifice some of your gross pay, the vouchers do not have tax or national insurance deducted from them. Under the existing rules, the tax and NI relief available is a maximum of £920 per parent per annum, irrespective of the level of your income.

From 6 April 2011, new joiners may receive only the following tax relief:

Based on the information you have supplied, it sounds like you would benefit from joining the scheme and it would be advisable to join the scheme prior to 6 April 2011, when the rules change for higher rate tax payers like yourself.

A final word of warning though- if, in the interests of simplicity, the employer decides to close the scheme to new entrants from 6 April 2011 to avoid the extra administrative burden, the scheme is then no longer ‘open to all employees’ and all current members of the scheme will be taxable and NICable in full!

Divorce and personal company

Q: A couple of years ago, I formed a company with my wife. We were both directors and held 50% of the shares each. Last year we split up; her shares were transferred to me and she also resigned as a director.

The company ceased trading recently, and it will be wound up informally. Can I claim entrepreneurs’ relief on the whole of the capital distribution paid to me on the winding up, or will just part of the distribution qualify because I only held 100% of the shares for a few months of trading?

A: You qualify for entrepreneurs’ relief on gains arising from all your shares, as you held at least 5% of the ordinary shares for 1 year up to the date the company ceased trading, and you were also a director throughout the last year of trading.

Therefore any shares you held in the company qualify for entrepreneurs’ relief, and you will pay capital gains tax at an effective rate of 10% on the capital distribution (after deduction of your annual exemption of £10,100); rather than tax at 28% or 18%.

Preparing your tax return when capital gains are being included can be tricky, so if you would like any assistance please feel free to contact us for help.

VAT on electric and gas

Q: I run a small shop. I have recently being reviewing my bills; looking for any possible savings. I noticed that sometimes my gas bills have VAT charged on them at 5% and other times the standard rate. Why does it fluctuate?

A: VAT on domestic use is normally charged at the reduced rate of 5% and for business use at the standard rate of 20%.

However, some businesses meet HMRC’s ‘de minimis’ rules and therefore, can have the reduce rate charged on their electric and gas supplies.

The low usage thresholds for common supplies are as follows:

Electric – an average of 33 kWh per day during the bill period

Gas – an average of 145 kWh per day during the bill period

Deliveries of no more than 2,300 litres of fuel oil, gas oil or kerosene

If your business meets the above requirements, it will also qualify for exemption from being charged the Climate Change Levy (CCL).

Your supplier should charge you the correct rate of VAT and CCL. Don’t forget, if your business is not VAT registered, the VAT element is a cost to your business and therefore affects your profits and cashflow. Therefore, it is important that you ensure these are correctly calculated.

Low paid staff – filing requirements

Q: I want to take on my first member of staff for 16 hours a week and I’ll pay her the minimum wage for now. What requirements do I have for the collection of tax and national insurance etc, and what do I need to file with HMRC?

A: Unless employees provide you with a P45 from a previous employment, you should always get them to complete HMRC form P46. However, assuming she indicates this is her only job since 6 April on the P46 (box A), you needn’t submit this to HMRC because she will be earning below the Lower Earnings Level (LEL), which for 2011/12 is £102 per week. You can simply file it away until her earnings exceed this level.

Again on the assumption that she ticked box A, you will not need to calculate any tax or national insurance because her earnings do not exceed either of the thresholds. So unless her earnings exceed the LEL, you can simply pay her gross pay.

You will not need to complete the annual forms P14, P60 or P35 either because her earnings were below the LEL. So you have no requirements to file anything with HMRC or provide anything to your employee.

On a practical note though, it sounds like your employee may be claiming tax credits and therefore, she may want you to fill out a P60 for her so that she has evidence of her earnings.

Although your situation is quite straightforward, payroll can be a minefield and penalties for late submission of returns are quite harsh. If you need help in this area please get in touch.

Can I offset interest from my re-mortgage?

Q: I have a buy-to-let property which I bought about 5 years ago for £130,000 cash. My wife and I have just had twins so we are looking to extend our house to accommodate our growing family. If I mortgage the buy-to-let property, am I able to offset the interest charge against the rental income? I’d be looking to raise about £40,000.

A: Generally speaking, it is not possible to offset the interest on a loan if the loan monies were not used for the purpose of the letting business.

However, there is a concession in HMRC’s Business Income Manual which gives landlords the opportunity to release equity from their portfolio and offset the interest regardless of what the money was used for.

The only restriction is that the amount of the equity release cannot exceed the original market value of the property when it was introduced to the lettings business.

Property can be a complicated area of tax, so feel free to talk to us about the issues involved.

Letting your house and CGT

Q: I bought my house about seven years ago and used to live in it. But I moved in with my girlfriend about five years ago, and since then, I have let my house out. I am now considering selling it so that we can buy a bigger house together. I know normally you don’t pay any tax when you sell your house, but have I lost this exemption because I let it out?

A: As you suggested, you are entitled to Only or Main Residence relief (OMR) on the sale of your house. In your case, the OMR will be restricted because you did not occupy it for the entire time of ownership. The last three years are counted as occupation, plus you lived in it for two years. This means your OMR will be restricted to 5/7ths of the gain.

However, you are in addition able to claim letting relief (assuming it was residential letting) and the amount you can claim is the lower of :

£40,000

The OMR relief due

The amount of the chargeable gain that is attributable to the period of letting, i.e. in your case, your gain after the OMR

Depending on the values involved, this may well wipe your gain out entirely.

As mentioned above, Capital Gains Tax is a particularly complex area and you should seek professional advice.

Holiday entitlement

Q: My husband and I run a small cafe as a partnership and have one member of staff. Their hours vary depending on how busy we are. How much paid holiday are they entitled to?

A: You must pay holiday for all employees- irrespective of the size of your business or the number of hours they do.

Employees are entitled to 5.6 weeks paid holiday per annum – 28 days for a ‘five day week’ worker. As your employee’s hours vary, you will need to pro rata this for the typical number of days a week they work and the number of hours. You may therefore find it easier to apply the percentage of 12.07% to the number of hours they work in a year instead.

They must give you notice of holiday to be taken, amounting to twice as long as the leave requested. But you have the right to refuse permission, provided you give as much notice as the leave requested.

Don’t forget that the leave entitlement runs with the holiday year in their contract. If they don’t have one, the year should start on the day the employee joined or the 1 October. Being seasonal, you may also want to specify when you want your employee to take their holiday; and when you don’t, in their contract.

For future reference, holiday entitlement is not restricted to just employees. It also applies to the broader definition of workers, so will also apply to anyone you may have working for you on a temporary, seasonal or casual basis.

Employment issues can be tricky, so please feel free to contact us. If we don’t know the answers then we can certainly put you in touch with an appropriate professional.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

When advising clients, one of the areas we examine in some detail is value added tax, not just whether or not they should register (if they have a choice!) but also which of the various schemes available is most suitable. The Flat Rate Scheme is intended to simplify VAT accounting, but in the right circumstances it can also result in improved profits. We have put together this guide to how the scheme operates; if you think it may be beneficial to your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.

VAT Flat Rate Scheme

The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT.

Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.

Who can join?

The scheme is optional and open to businesses that do not breach the relevant limits which have recently changed due to the increase in the standard rate of VAT. From 4 January 2011, a business must leave the scheme when income in the last twelve months exceeds £230,000, unless this is due to a one off transaction and income will fall below £191,500 in the following year. A business must also leave the scheme if there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days.

The turnover test applies to your anticipated turnover in the following 12 months. Your turnover may be calculated in any reasonable way but would usually be based on the previous 12 months if you have been registered for VAT for at least a year.

To join the scheme you can apply by post, email or phone and if you are not already registered for VAT you must submit a form VAT1 at the same time.

You may not operate the scheme until you have received notification that your application has been accepted and HMRC will inform you of the date of commencement.

When is the scheme not available?

The flat rate scheme cannot be used if you:

use the second hand margin scheme or auctioneers’ scheme

use the tour operators’ margin scheme

are required to operate the capital goods scheme for certain items.

In addition the scheme cannot be used if, within the previous 12 months, you have:

ceased to operate the flat rate scheme

been convicted of an offence connected with VAT

been assessed with a penalty for conduct involving dishonesty.

The scheme will clearly be inappropriate if you regularly receive VAT repayments.

How the scheme operates

VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period. This will include any exempt supplies and it will therefore not generally be beneficial to join the scheme where there are significant exempt supplies.

The percentage rates are determined according to the trade sector of your business and range from 4% to 14.5%. The table in the appendix to this factsheet summarises the percentages. In addition there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration. The percentages used in the scheme changed from 4 January 2011 to reflect the increase to 20% in the standard rate of VAT.

If your business falls into more than one sector it is the main business activity as measured by turnover which counts. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.

Although you pay VAT at the flat rate percentage under the scheme you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate rate.

Example of the calculation

Cook & Co is a partnership operating a café and renting out a flat. If its results for 2011 are as follows:

Treatment of capital assets

The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. You can claim input VAT on such items on your VAT return in the normal way. Where the input VAT is reclaimed you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.

Items under the capital goods scheme are excluded from the flat rate scheme.

Transactions within the European Community

Income from sales of goods is included in your turnover figure.

Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above.

The rules on services are complex. Please get in touch if this is an issue so that we can give you specific advice.

Records to keep

Under the scheme you must keep a record of your flat rate calculation showing:

your flat rate turnover

the flat rate percentage you have used

the tax calculated as due.

You must still keep a VAT account although if the only VAT to be accounted for is that calculated under the scheme there will only be one entry for each period.

Summary

The scheme is designed to reduce administration although it will only be attractive if it does not result in additional VAT liabilities. The only way to establish whether your business will benefit is to carry out a calculation and comparison of the normal rules and the flat rate rules.

How we can help

We can advise as to whether the flat rate scheme would be beneficial for your business and help you to operate the scheme. Please do not hesitate to contact us.

“Labour-only building or construction services” means building or construction services where the value of materials supplied is less than 10 per cent of relevant turnover from such services; any other building or construction services are “general building or construction services”.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!!

Bad debt adjustments

Q: I have recently found out that one of my customers has been declared bankrupt. Unfortunately, I invoiced them four months ago for £1,000 plus VAT of £175 and as this is still outstanding, there is a good chance I won’t receive this and will need to write it off.

How do I account for this in my December 2010 year-end accounts and what income tax relief can I get? And what do I do about the VAT?

A: As the debt is only possibly irrecoverable at this stage you may only ‘provide’ for the debt. You will therefore reduce the amounts owing to you at 31 December by £1175.

For income tax purposes, the doubtful debt expense of £1,000 is allowable because it is for a specific debt and therefore written off in the profit and loss account.

Provided that you have paid the VAT over to HMRC, you can reclaim VAT that you paid and which you have not received from the customer, provided that either the Official Receiver has notified you that no monies will be forthcoming or the debt becomes six months old or more.

You add the amount of VAT you are reclaiming to the amount of VAT you are reclaiming on your purchases (input tax) and put the total figure in Box 4 of your VAT Return.

If you cash account for VAT, you will never have paid the VAT over to HMRC and therefore, you are not due a refund from HMRC. You will merely need to do the accounting adjustment above.

If you would like more information of the treatment of bad debts, and a referral to help with collecting overdue amounts, get in touch.

Qualifying years for National Insurance

Q: Last year I incorporated my business and I now draw a small monthly salary and quarterly dividends, which means I do not have to pay any tax or National Insurance. Should I be paying National Insurance to protect my rights to state pension and benefits?

A: National Insurance is charged on income from employment when the earnings exceed £110 per week. However, if your earnings are above the Lower Earnings Limit (currently £97 per week) you are still credited with a qualifying earnings period for state pension and benefits.

If your earnings fall under the Lower Earnings Limit, you can consider making voluntary National Insurance Contributions.

Certain individuals may also be entitled to National Insurance credits where they have not been earning due to caring for a younger child or disabled person, or where they are an approved foster carer. There are also credits available for people in receipt of certain state benefits.

You have not stated your age, but if you are concerned about your state pension, you should apply online for a forecast at www.direct.gov.uk.

High earners tax tips

Q: I am the Director of Marketing for a London-based company and have a salary of £120,000 per annum, plus benefits. What changes are going to affect me during 2011/12, and how can I mitigate these changes?

A: From April 2011, the Government is lowering the 40% higher rate band from £37,401 of taxable income to £35,001, to ensure high earners do not benefit from the £1,000 increase in the personal allowance. National Insurance will also rise by 1%.

Furthermore, those earning over £100,000 like you will lose their personal allowance at a rate of £1 for every £2 of income in excess of this band. And worst of all, income in excess of £150,000 will be taxed at the Additional Rate of 50%. You’ve mentioned that your employer gives you benefits in kind, so this may well apply to you.

High earners have been one of the hardest hit by the Budget, so you need to be more aware of the allowances available to you and smarter with your tax planning. Here are some really simple ideas for you to consider:

Investing up to £10,680 in an ISA

Top up your pension. Whilst relief has reduced to contributions below £50,000, contributing to your pension remains one of the best ways to reduce your tax liability

Transferring assets to someone you trust such as your spouse if they are a lower tax rate payer, to cut your overall tax bill as a couple. There are pitfalls here for the unwary!

Childcare vouchers. Their benefits have been reduced for higher rate tax payers, but there are still some tax savings

Putting your money in investments with capital growth; rather than income such as dividends, to make use of your Annual Exemption of £10,100

Consider investments in Venture Capital Trusts or through the Enterprise Investment Scheme

Donating under the Gift Aid scheme

Staff suggestion box

Q: We have a staff suggestion scheme in place and one of the staff has come up with a great idea that we think will create less waste during our manufacturing processes. Consequently, we think it will save us about £14,000 over the next twelve months and about £10,000 annually.

What is the maximum that I can pay him without having to deduct tax and NI?

A: As a result of you adopting the suggestion and it being expected to lead to efficiencies that you estimate will save you money, you meet the exemptions under the ‘financial benefit award’ rules for staff suggestion schemes.

There are two ways of calculating the award. The first is to pay 50% of the expected first year savings. The second method is to apply 10% to the expected savings over the first five years.

With both of these methods, there is an overriding amount of £5,000 that can be paid without the employee being subject to PAYE and NI. Any payment above this will be subject to PAYE and NI and should be added to your employee’s wages in your normal payroll calculations.

The first method results in an award of £7,000 and the second £5,400. However, if you wish to avoid tax, then the maximum you can pay him is £5,000. You would then not need to make any deductions and have no additional reporting requirements.

Use of home

Q: I’ve been talking to my mates down the pub, and I’ve found out that some of them claim lots more Use of Home in their accounts than I do- yet we do similar things. Why is that?

A: There are two main ways of calculating use of home. If there is only minor use, for example writing up the business records at home, you may put through a reasonable estimate with little risk of dispute by HMRC. Needless to say, it should be consistent with your household utility bills though.

If you were based from home, then you could apportion the household bills such as gas, electric, water etc by dividing the total costs over the number of rooms, and multiplying that figure by the number of rooms used for business purposes.

In order to satisfy tax law, when part of the house is being used for the business then that must be the sole use for that part at that time. Thus if the part of the home used for business purposes is simultaneously used for some other non-business purposes, then no deduction is available.

As you can see from the above, if you don’t work from home regularly, you may be using the first method. If you are working regularly from home, then it would be advantageous to use the second, i.e. apportionment method.

In practical terms, you will need to be seen to be applying common sense to your claim, for example, if you only write up your books at home, there would be a far smaller charge than if you were working each day from home and treating it like an office. Although there is no fixed proportion of costs for particular trades, there is an expectation of what use of home will amount to. Any enquiries from HMRC will be more likely when the amount of use of home claimed is significant and inconsistent with the nature of the trade. If the room has a dual purpose, you must be aware that the room should not be used for any other purpose whilst it is being used for business purposes.

Each case will be different, so if you would like advice in this area, please feel free to contact us.

VAT errors

Q: I finished drawing up my books for the year ended 31 December 2010, and realised I’d made an error with my VAT. I think when I totalled up the input VAT for the June quarter, I missed out a whole page of my cashbook expenses.

Am I able to reclaim this now somehow?

A: You may correct errors that arose in VAT accounting periods that ended up to four years ago.

At the end of your VAT accounting period, if the net value of previous return errors is less than £10,000 and 1% of the Box 6 figure on your VAT return for the period when you discover the error (subject to an upper limit of £50,000), then you can make the adjustments to correct the error on the next return.

As your mistake was not deliberate or careless, no penalties or interest should arise.

However, if you had made a deliberate or careless error, you could have been required to separately notify HMRC and in this instance, HMRC would probably have levied penalties which can be up to 100% of the error.

In conclusion, you will be able to reclaim the input VAT on your next return provided it meets the criteria above.

VAT and cashflow

Q: The settlement of my VAT liability each quarter is beginning to become a burden in these difficult times. Is there anything I can do to reduce my liability or ease my cashflow?

A: Firstly, you may be able to reduce your liability by registering for the Flat Rate Scheme (FRS). Basically, you would pay an industry specific percentage (set by HMRC) of your turnover inclusive of VAT at the standard rate. You would not be able to recover your input VAT, unless it was on capital items costing in excess of £2,000 (including VAT). You would need to assess whether the scheme would be advantageous for you. However, you should bear in mind that once you join the scheme, you must remain in it for 12 months and your VAT exclusive turnover must be below £150,000 p.a.

If your annual turnover is above £150,000 but below £1.35m, then you could apply to use the Annual Accounting Scheme. You make 9 monthly payments based on the previous 12 months with a final balancing payment and only submit one return per year.

If your customers are slow to pay and your VAT taxable turnover for the next 12 months is expected to be under £1.35m, you could apply the Cash Accounting Scheme. This will mean that all VAT is accounted for on sales invoices only once customers have settled them, and on your suppliers’ invoices when you pay them; not when they are raised.

The above schemes may be used in conjunction with one another.

As you can see, there are a number of things to consider and therefore we suggest you contact us for specific guidance and advice, before making a decision.

Amending a tax return

Q: I rushed the preparation of my 2009/10 tax return in order to file it on time, but I have just realised that I missed off my rental accounts!

Can I revise my tax return and will I incur any fines for doing this?

A: If you make a mistake on your tax return, you’ve normally got 12 months from 31 January after the end of the tax year to correct it.

You may notify HMRC in the form of a letter to your Tax Office, detailing the omissions and which page numbers and boxes are affected. Or you may find it easier to write to them and enclose an amended return or just the particular pages that have changed. Alternatively, if you filed your return online with HMRC, you may make any alterations online.

No penalties for late filing will be applicable, but please be aware that if the amendment results in additional tax to pay, you will be charged interest from the due date of payment. As 28 February has also now passed, you will be liable to a 5% surcharge on any unpaid tax. And a second 5% surcharge will apply from 31 July 2011 if it continues to remain outstanding at that point.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!!

Tax Point of a Transaction for VAT

Q: I have recently registered for VAT and I am getting slightly confused regarding when my supplies and purchases take place in regards to VAT quarters. Could you please explain to me when a transaction takes place for VAT purposes?

A: The date when a transaction takes place for VAT is called its tax point. It is not always the date the supply is actually made. It is vital that you apply the correct tax point to a transaction to ensure that the VAT is declared on the right VAT return and at the correct rate.

The basic tax point is the date at which the goods are made available to the customer (or for services the date they are performed). If a VAT invoice is issued before this date, the date of the invoice becomes the tax point. Similarly, if payment is received before the goods are supplied/ work is done, then the date of payment becomes the tax point.

The date a VAT invoice is issued will also become the tax point if it is issued between 1 to 14 days after the supply takes place. If an invoice is issued 15 days or more after, then the date of supply remains the tax point.

It is possible to raise a pro-forma invoice for goods which you have not yet supplied or received payment for. A pro-forma invoice is not a VAT invoice, but it does enable the business to raise a sales document. No VAT is due on this document and it must be clearly display a message such as ‘This is not a VAT invoice’.

Share Transfer Procedure

Q: I am a shareholder and director of a close limited company. There are four shareholders, each owning a 25% share in the company. One of the shareholders wishes to pursue other ventures and wishes to transfer his share holding equally among the remaining 3 shareholders. Could you please explain the process and any tax implications?

A: The first thing you must do is check the company’s articles of association to ensure that a share transfer of this type is allowed. When Table A model articles have been adopted, share transfers are permitted.

An ordinary resolution must be passed by the board of directors either at a general meeting or by written resolution.

The stock transfer form J10 should be filled in and sent to HM Revenue & Customs for ‘stamping’ if the consideration (payment) for the transferred shares is over £1,000. If the consideration is over £1,000 stamp duty will be payable to HM Revenue & Customs at a rate of 0.5%.

A share certificate should be issued to the new shareholder(s) stating the company name, location of registered office, company registration number, shareholders name, share holding details and signatures.

The company’s internal books and registers should be updated and Companies House must be informed of the transfer on the next annual return.

This is one of the many services included within our Company Secretarial Support Services.

Lease Premium

Q: My business has just taken out a 10 year lease on a new factory. We have been charged a lease premium of £12,500. Could you please advise me what a lease premium is and how it will be treated for my accounts and tax?

A: A lease premium is a non-refundable lump sum paid by the tenant (lessee) to the owner (grantor) upon signing a tenancy agreement.

As the lease is under 50 years, it will be classed as a short lease.

In the accounts, the premium will be capitalised as a leasehold asset and amortised (written off) over the term of the lease. The amortisation is then added back for tax purposes.

To calculate the actual relief available for tax purposes, first find the amount of the premium assessable on the grantor to capital gains tax using a simple formula:

This figure is taken away from the premium leaving the amount assessable to income tax on the grantor as property income. This is also the amount allowable for tax for the lessee, using the straight line basis over the number of years of the lease.

Hire Purchase

Q: I am about to buy a new van through my limited company. It will be used 100% for business purposes. I have been looking into various ways of financing the purchase and I am a little bit unsure of what is meant by the term hire purchase. Could you please explain to me how hire purchase works and also how to account for it in my company bookkeeping? We are a VAT registered company so what happens with VAT?

A: A hire purchase agreement is a method of spreading the cost of capital items over a number of years. The purchaser enters into a contract with a finance company who initially funds the purchase.

The buyer usually pays a deposit and spreads the remainder of the cost into monthly repayments over the course of the agreement. The monthly repayments will include interest at a pre-agreed rate. Legally, the asset remains the property of the finance company until the final payment is made. The final payment is normally higher than the monthly repayments. This is often referred to as a ‘balloon payment’.

To account for the hire purchase you will need to make the following entries in your company’s books:

When the asset is initially purchased:

Debit the assets code with the net amount of the purchase

Debit the full amount of VAT to input VAT (assuming you are not partially exempt)

Credit a hire purchase creditor on the balance sheet with the full amount

The VAT is reclaimable in the relevant VAT period in which you acquired the van..

Monthly payments will decrease the liability but will also contain an element of interest which must be added to the liability. The entries are as follows:

Debit the hire purchase interest code on the profit and loss account

Debit the liability with the amount of the repayment less the aforementioned interest

Credit the bank with the gross repayment.

Over the course of the agreement, the balance sheet creditor will therefore diminish.

The asset will need to be depreciated as a normal asset each year

For tax purposes, the interest in the profit and loss is allowable, the depreciation will be added back, but the van will qualify for capital allowances- potentially 100% relief in the year of purchase if you have not used all of your Annual Investment Allowance.

Where we carry out bookkeeping for our clients we take of the entries ourselves. Where our clients carry out their own bookkeeping we will, if requested, provide a schedule showing how all payments throughout the term of the hire purchase agreement should be treated.

Payments on Account

Q: I am in full time employment, but last year I also started doing some self-employed work. I am taxed at basic rate in my employment, but think I may be subject to some higher rate income tax on my self-employment. I know I will have to do a tax return after April this year, but when will I have to pay the tax on my profits?

A: The tax due on your first trading profits for 2010/11 must be paid on or before 31 January 2012. In addition, if the tax to be paid for 2010/11 exceeds £1,000 you may also need to make payments on account for 2011/12.

Payments on account are due where the underpayment at 5 April exceeds £1,000 and less than 80% of the total tax due for the year was deducted at source, eg through the PAYE system. If you do need to make payments on account for 2011/12, each one will be 50% of the previous year’s liability, becoming due on 31 January and 31 July 2012.

If the tax due for 2010/11 is less than £2,000 and you submit your 2011 tax return to HM Revenue & Customs before 31 December this year, you could opt to have the underpayment collected through your PAYE code from 6 April 2012. This method of payment is beneficial from a cashflow point of view, but also means that you do not need to make payments on account for the 2011/12 year either.

There is one more consideration that you need to make and that is regarding National Insurance. As a self-employed individual you need to be registered for Class II National Insurance, but in addition your profits may be subject to Class IV National Insurance. Where an individual has both employment and self-employment income, consideration needs to be given to claiming deferment for Class IV National Insurance, in order to avoid a potential overpayment. The rules governing the interaction of Classes I, II and IV National Insurance and complex and you should therefore consider seeking professional guidance.

Loans from directors

Q: I am a director and owner of a limited company that I have loaned money to. Can I charge the company interest on this loan?

A: The short answer is yes you can. The interest charge in the company accounts will be an allowable expense for Corporation Tax purposes. However this does mean that the interest received by you will be subject to income tax.

When companies pay interest to an individual they must deduct basic rate tax at 20% in the same way that a bank deducts tax on the interest it pays to savers. The company must also complete form CT61 every quarter to record the interest paid and tax deducted. This form must be submitted to HM Revenue & Customs along with payment of the tax deducted. For example, if a company makes an interest payment of £100 then the director will physically receive £80 and the company will pay the remaining £20 to HM Revenue & Customs. If you are a lower rate tax payer then there will be no further tax on this interest, however there will be additional tax to pay when you complete your tax return if your income is in the higher brackets.

If you would like to find out more about paying interest to directors then please contact us for specific advice.

Reclaiming VAT on mileage claims

Q: A number of my employees use their own vehicles for business purposes. They submit a monthly expenses sheet to me and I then reimburse them using the HMRC approved mileage rates. Can I claim back any VAT on these amounts?

A: Yes, but unfortunately you will not be entitled to claim back VAT on the full amount. Instead you can reclaim the VAT applicable to the deemed fuel element of the mileage rate and you need to ensure the employee submits a valid VAT receipt for fuel purchased in support of the claim.

The requirement to submit a valid VAT receipt was introduced as a result of a ruling made against the UK in March 2005. In that case, the European Court ruled that the UK legislation which allowed employers to reclaim the VAT element on mileage claims submitted by employees was in breach of EU legislation for two reasons:

the purchases are actually supplied to the employees as private individuals and therefore the employers have no right to deduct because the goods are not supplied to them as taxable persons.

even if there were a right to deduct, employers as taxable persons cannot exercise that right because they do not hold a VAT invoice.

The UK government has therefore introduced secondary legislation which allows employers to recover the VAT on fuel purchased by their employees for business purposes, as long as they hold a valid VAT invoice in support of the claims that are submitted.

Tax credits

Q: Lots of our friends are claiming tax credits and as our business profits have fallen in the recession, they are telling us to apply because we’ll probably be eligible. But how do we go about applying and are we likely to qualify?

A: If you don’t have children, you need to at least meet the following conditions:

Aged 25 or over and do paid work for at least 30 hours a week

If you are disabled, you must be at least 16 and do paid work for at least 16 hours a week

If your partner or you are aged over 50 or over and are going back to work after being on ‘out of work’ benefits such as Jobseekers Allowance or Income Support, you must do paid work for at least 16 hours a week

If you have children, you need to be 16 or over and doing paid work for at least 16 hours a week.

If your household’s income is less than £18,000 for the year ended 5 April 2010, you are likely to qualify for tax credits.

As covered heavily by the Press, the tax credits system will be changing from April 2011 and thereafter, households with income above £40,000 will be less eligible to receive tax credits.

To make an application to claim tax credits, you must complete a claim form which can only be ordered from the Tax Credit Helpline on 0845 300 3900. You must have your National Insurance number to hand when you call.

The above list is not conclusive and there are other circumstances to take into account. But if all of the above applies, it would certainly be worth obtaining and completing a claim form.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!!

Margin Scheme

Q: I am a second-hand car dealer who is now approaching the threshold for VAT registration. A friend of mine who also deals in second-hand goods, albeit art and antiques, has informed me that there may be a VAT scheme which I can use to minimise my liability and administration costs. Could you please advise me if such a scheme exists and explain the mechanics behind it?

A: The VAT margin scheme works by enabling traders who deal in second-hand goods to account for VAT only on the difference between the price paid for an item and the price at which you sell it – the margin. You will not be able to reclaim any input VAT when the goods are purchased and will only pay over to HMRC VAT on the difference between the purchase and selling price. You won’t pay any VAT if you don’t make a profit on a deal and if you use the margin scheme, you can still use normal VAT accounting for other items that you sell. You can also reclaim VAT on business expenses such as overheads.

You can only use the margin scheme for a vehicle that has at some point actually been driven on the road for business or pleasure – HM Revenue & Customs (HMRC) doesn’t consider a vehicle to be second-hand just because it’s been registered, has delivery mileage and has been bought and re-sold.

You can only use the margin scheme for a vehicle that has at some point actually been driven on the road for business or pleasure – HM Revenue & Customs (HMRC) doesn’t consider a vehicle to be second-hand just because it’s been registered, has delivery mileage and has been bought and re-sold.

Your purchase price is everything which you had to pay for the vehicle. You must not reduce the margin by deducting any cost to you of bringing the vehicle to sale such as repairs, refurbishment, accessories or your business overheads. Your selling price is everything which you are to receive for the vehicle, whether from the buyer or a third party. It includes incidental charges such as for an MOT and accessories fitted prior to the sale.

You can only use the margin scheme for a vehicle that has at some point actually been driven on the road for business or pleasure – HM Revenue & Customs (HMRC) doesn’t consider a vehicle to be second-hand just because it’s been registered, has delivery mileage and has been bought and re-sold.

You should be aware that it is still your gross sales, rather than just the total of the ‘margins’ which makes up your VAT turnover for registration purposes.

Capital Allowances – Integral Features

Q: My company is currently in the process of constructing a new business premises. I am aware that the old industrial building allowances have gradually been phased out. Is there any immediate tax relief we can get on the construction of the building?

A: It is correct to say that industrial building allowances are being phased out and will be completely withdrawn from April 2011. However expenditure on the provision or replacement of integral features can qualify for capital allowances. Assets which are classed as integral features are an electrical system, a cold water system, a space or water heating system, a powered system of ventilation, air cooling or air purification including floors or ceilings in such a system, a lift, an escalator or moving walkway and external solar shading.

Integral features qualify for an annual writing down allowance of 10%. This rate is thought more appropriate as the integral features usually have a longer useful economic life than other plant and machinery. Despite the lower writing down allowance the expenditure can be claimed under the annual investment allowance so the expenditure could be claimed in full up to the annual investment threshold of £100,000. This may be more advantageous when other assets purchased qualify for the main writing down allowance of 20%.

Overseas property

Q: I own a property in Spain and I have been told that I have to declare the income from this property on my UK tax return, is this correct?

A: If you live and pay tax in the UK then you must declare rental income from overseas rental properties on the foreign pages of your tax return. The profit from the overseas lettings can be worked out in exactly the same way as for a UK property; however if you make a loss from the rental then this cannot be offset against profits from UK rental properties. Another thing to consider is that if you live and pay tax in the UK then if you sell the property and make a gain this will be subject to UK Capital Gains Tax.

If you do make profits or a capital gain then you may find that there is a foreign tax charge. If this is the case then you will usually get some relief on your UK tax return for this, so that you do not end up paying tax twice.

The above assumes that the taxpayer lives and pays tax in the UK. However if you are not originally from the UK, or spend less than half of the year here then the tax situation can change. The residency status of an individual is a complex area of legislation and if you have any queries concerning your liability to tax on overseas rental properties please take personal advice.

Distance selling

Q: My VAT registered business is selling goods by mail order and I have just dispatched some goods to an individual in France who is not VAT registered. Should I be charging VAT on these goods?

A: When you sell to non VAT registered individuals in EU countries this is known as distance selling and the sale is treated as if it has taken place in the UK. Therefore you must charge VAT at the applicable UK VAT rate and enter the details in Box 1 and Box 6 of your return as normal.

If however the level of your sales to any one EU country exceeds a certain limit then you must register for VAT in that country. This limit is known as the distance selling threshold. Each EU country sets its own threshold which can be between €35,000andr €100,000 per year (or the country’s currency equivalent if not using Euro’s). Once a UK business registers for VAT in an EU country then all the sales made to individuals there will be subject to the VAT rate applicable in that country instead of the UK.

VAT – online registration

Q: I have been registered for VAT for a number of years and still do my VAT returns manually and send them in. Can I continue to do this or do I have to do it online.

A: If your annual turnover is over £100,000 you should have been filing your returns online from 1 April 2010 and paying any VAT electronically. If your annual turnover is below £100,000 the deadline to go online is 1 April 2012. If you should have been filing online from 1 April 2010, HMRC will start issuing penalties to businesses who fail to submit their return online after 31 March 2011. If a return for a period ending after that date is not filed electronically, an automatic penalty will be charged. This will be between £100 and £400 depending on your annual turnover.

The VAT online service system is fairly straight forward and has additional advantages which include setting up an email reminder service to advise when your next online VAT Return is due. Another benefit as you are required to make payments electronically either through Direct Debit, internet banking, telephone banking, is that you receive a further seven extra calendar (in addition to the usual one month deadline) to file your return and for the payment to reach the HMRC bank account.

What is a Dormant Company?

Q: I am intending to temporarily stop trading through my limited company and return to employment for personal reasons. I have been told that I can leave my company dormant for this period and return to it at a later date. Could you please explain to me what a dormant company is?

A: Companies House and HMRC both have differing definitions of what they class as a dormant company.

Companies House define a dormant company as a company which has no significant accounting transactions during it accounting period. A significant accounting transaction is one which it should enter in its accounting records. If a company has been dormant since the end of its last accounting period there is no need to submit full accounts. A dormant set of accounts can be submitted which do not have to contain a profit and loss account or a directors report. An annual return does still have to be filed yearly while the company is dormant.

HMRC consider a company to be dormant when it is not active, i.e. they are not trading. If no sales are made by a company HMRC will consider them dormant for tax purposes. A dormant company is not required to make a tax return. This exemption is gained by writing to HMRC informing them of the date on which the company stopped trading. In return HMRC will issue a final notice to file (if appropriate) and will not issue another notice until they are informed in writing that the company is once again trading.

How to Register a Partnership?

Q: My business partner and I have decided to carry on trade as a partnership. What are the formalities in registering ourselves and the partnership with the tax authorities?

A: When you become self employed you should register with HMRC. You can register either online, by telephone or by post. Details on how to register online or by telephone are on the HMRC website, http://www.hmrc.gov.uk.

If registering by post, HMRC have issued new forms from 25 October 2010 to use for partners and partnerships.

Form SA400 should be completed on behalf of the partnership by the nominated partner and will enable HMRC to issue the partnership with a unique taxpayer reference (UTR) number. This number should be quoted on the partnership self assessment tax return. Form SA401 should be completed by each partner and will enable HMRC to issue them with a UTR, if they do not already have one. This form will also register the partners for class 2 national insurance contributions.

If you need assistance on registering with HMRC or starting a business please contact us.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!!

Meals provided for employees

Q: I own a gift shop and we are now opening longer hours in the run up to Christmas. On certain days this means opening late at night and we are now opening on Sundays too. I need my staff to do additional hours during this busy period and want to pay for their meals when they are working longer hours than usual. If I do this, will they have to pay tax on the cost of me providing the meals?

A: If you offer free or subsidised meals at your business premises for your staff, this can be done free of tax and National Insurance, but only if the offer is made to all employees, including directors and part-time workers. If the offer is only made to certain employees, the exemption does not apply and then the cost of every meal represents a chargeable benefit in kind. This must then be reported on the employer year end P11D forms, and tax and National Insurance would be due on the cost of providing the food and drink.

It is important to note that the offer has to be available for all employees, but if any staff decline the offer, it does not mean that the exemption is lost. The meals do not have to be given to all employees at the same time, they just all need to have the opportunity to take them. You should therefore consider the different working patterns of your staff and perhaps offer the meals at various times on different days of the week to ensure that all staff are included.

If the meals do not qualify for the exemption, you could, as the employer, offer to settle the tax and national insurance liabilities on behalf of the staff, however this would increase the cost to you considerably.

Increase in VAT standard rate

Q: I know that the standard rate of VAT is due to increase in January 2011, but can you tell me how this will affect my business?

A: The standard rate of VAT will increase from 17.5% to 20% with effect from 4 January 2011. The way in which this will affect your business will depend on whether you are a cash or invoice business.

If you have a cash business, the new rate of 20% will apply to the takings you receive on or after 4 January 2011 and you should ensure that your pricing and any electronic till systems are updated to cope with this. For any sales made prior to that date, the current rate of 17.5% will continue to apply.

If you are raising invoices, the new rate should be shown on all invoices raised on or after 4 January 2011 providing that they are being raised within 14 days of the goods or services being provided. On the other hand, if you raise an invoice after the new rate has been introduced which relates to goods or services that were provided before 4 January 2011, you can apply the current rate of 17.5%. This would probably only be necessary where you are supplying a non-VAT registered customer though, as a VAT registered business could just reclaim the higher amount on their next VAT return.

It is important to remember that if you raise a credit note on or after 4 January next year, you must apply the VAT rate that was in force at the time when the original invoice was issued.

Dormant Company

Q: I have been self-employed for a few years and due to the success of my business, I am now considering incorporating so I can trade through a limited company. I have used my current trading name since I first started and want to use the same name for my limited company. Will I be able to do this and can I protect the business name?

A: One way of partly protecting the name is to set up a dormant limited company, which you can trade through at a later date when you decide to incorporate your business. Although you would not be using the company to run your business at first, it would still be subject to the same filing requirements with regard to an annual return and accounts, but would be classed as dormant if no trading transactions have taken place.

Simplified dormant company accounts must be submitted to Companies House each year, and HM Revenue and Customs should also be informed of the company’s dormant status.

Once you decide to bring your business into the dormant company, all the assets and trade should be transferred in and Companies House and HMRC must be notified of the change in status for the company. Form CT41G (new company details) should be completed and filed with HMRC in order that notices to file corporation tax returns can be issued.

If at some point during the company’s life trade ceases for any reason, the company may be put back into a dormant state to avoid the need for full accounts and tax returns to be submitted to HMRC; however abbreviated accounts would still be required by Companies House.

It is important to remember that the timing of an incorporation, or indeed cessation of a business can be crucial from a tax point of view and therefore it is a good idea to seek professional advice before you stop or start trading, in order that it can be managed in the most tax efficient way. If you would like to discuss this, please contact us and we will be happy to speak about the circumstances that may apply to your business.

Gift aid relief on one off donations

Q: I will be attending a number of fund raising functions over the festive season. I know that I get tax relief on the regular charitable donations I make under the gift aid scheme, but what about one off donations I make and items purchased in auctions at such events?

A: One off donations do qualify for tax relief, providing that the guidelines set out for gift aid relief are followed. For the charity to claim tax relief under gift aid, you must provide personal details including your name and address and confirm that you are a taxpayer. This entitles the charity to treat your donation as being made net of basic rate tax and the charity then reclaims the calculated amount of basic rate tax. In addition, if the donor is a higher rate taxpayer, they can claim higher rate tax relief on the amount donated.

The payment for an item at a charity auction is not officially a gift to charity, but HM Revenue & Customs do recognise that people may intentionally pay more than an item is worth, in order to support the charity. The Revenue will therefore treat such payments as donations qualifying for tax relief under the gift aid scheme, providing that the other rules of the scheme are met and the benefits don’t exceed certain limits.

To calculate how much can be considered as a qualifying donation for gift aid relief, you need to consider if the item is commercially available. Where you can buy the item, the amount over and above the retail price is considered to qualify for gift aid. When it is not available, for example an item that is signed by a particular celebrity, the value of the item auctioned is the price paid by the successful bidder. A bidder is likely to be prepared to pay more for such an item because it is unique.

Where an individual purchases a number of different items at charitable auctions, each item must be considered separately as the treatment could differ for each item purchased. It is therefore advisable to seek professional advice in order that the correct relief is claimed.

Corporate gym membership

Q: I would like to treat my staff with a bonus this Christmas and was considering a corporate gym membership at a local health club. Will my staff have to pay any tax or National Insurance on the amount I pay for their membership?

A: If you provide your staff with access to sporting or recreational facilities, this can be a tax free benefit in kind for the employees providing that certain conditions are met, although gym membership is unlikely to qualify.

The facilities must be available for use by all of your firm’s employees and must not be available to the general public. The facilities do not have to be used exclusively by your firm’s employees though, so if you jointly offer the facility with another firm and their employees use the facilities too, the membership is still tax free.

The cost of the membership is not tax free where the facilities are open to the public, or based at a private residence or holiday accommodation, or where the membership provides you with use of a vehicle (which includes boats and aircraft).

You may wish to consider securing preferential rates at your local health club or gym rather than offering to meet the full cost of the membership, as the provision of the membership will be a taxable benefit in kind and your staff will be taxed on the amount you pay on their behalf.

Category: PAYE, NIC & Benefits In Kind

Going to work on a ship

Q: Unfortunately I had to close my restaurant earlier this year due to the recession. After several months of looking for work, I have just got a new job working on a ship. A friend told me that if I work overseas, I will not have to pay tax on my earnings, is that correct please?

A: There are special rules for employees who are classified as seafarers and providing that certain conditions are met, it may be possible to claim the seafarers’ earnings deduction.

In order to qualify, you must be working under a contract of employment as the rules do not apply to self-employed individuals. You must be working on a ship – oil rigs and offshore installations do not qualify, but cruise liners, tankers and passenger vessels do qualify as ships for this relief. The other main condition is that you must be working wholly or partly abroad – this means outside UK territorial waters.

You must have a qualifying period of at least 365 days in order to be eligible to claim the relief and you must spend more than fifty percent of that time outside the UK for that period. Days of departure from and return to the UK must be recorded and any documentation to support those dates should be retained. You must record all ports of call for each voyage, as well as details of each ship you work on.

Claims must be made on a self assessment tax return each year and there are special sections that must be completed in order to claim the relief. Providing that a qualifying claim is made, the earnings during that qualifying period are not subject to tax in the UK.

This is a complex area of legislation and you should seek advice about your own personal circumstances to ascertain whether or not you will be eligible for the relief.

National Insurance Contributions for the self-employed

Q: I recently applied for a state pension forecast and have had a response showing that I have already contributed enough to get my state pension. Does this mean that I can stop paying National Insurance on my self-employed earnings?

A: Unfortunately, just because you have contributed enough National Insurance to qualify for your state pension, this does not mean that you can stop paying National insurance if you have not yet reached pensionable age.

There are two classes of National Insurance that are applicable to self-employed individuals, Class II which is sometimes called the ‘weekly stamp’ and Class IV which is levied on profits if they exceed a certain amount.

Class II National Insurance Contributions must be paid until the earlier of the date on which you cease to trade, or the day on which you reach the qualifying age for state pension. For those individuals who have a low income, it is possible to apply for a small earnings exemption from Class II.

Class IV National Insurance Contributions are computed according to the net profit each year on your self assessment tax return. The final liability for Class IV Contributions falls in the tax year you cease to trade, or the year you reach the qualifying age for state pension.

National Insurance is a complex area of legislation, particularly for individuals who are required to pay more than one class. If you have any queries concerning your liability to pay National Insurance, please consult us.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.